Why one of the longest American stock market bull runs in history has come to an end

Why one of the longest American stock market bull runs in history has come to an end

A series of trade wars, growing financial pressure on heavily indebted emergent economies and a series of interest rate increases launched by the US Federal Reserve have combined to bring an end - for now at least - to one of the longest American stock market bull runs in history, writes Kyran Fitzgerald.

Why one of the longest American stock market bull runs in history has come to an end

In its last phase, the surge on Wall Street was driven in large part, if not almost exclusively by demand for high flying technology stocks.

Apple became the first $1trn company by valuation while Amazon founder Jeff Bezos was anointed as the world’s richest man.

As Christmas drew near, the financial media reported on a record shift into bonds by investors in search of security while the surge, earlier this year, in energy prices was well on course for correction. 

As the FT put it, ‘the US shale juggernaut will stomp on Opec’s oil prices.’ A noticeable slowing in global economic growth has fed into the commodities market raising very real issues for nations dependent on strong price growth.

One of the big questions being posed is how best we can we avoid an emerging market crisis in 2019?

Already, Argentina is back in the IMF sick bay while Turkey is wobbling. South Africa is looking fragile, but at least Cyril Ramaphosa is tackling some of the excesses of his predecessor Jacob Zuma.

The popularity of Russia’s leader, Vladimir Putin, has dipped dramatically after he was forced by his fiscal circumstances to hike the national pension age.

Will Mr Putin get the message by quietly reining in spending on the military or will he double down and look for further external distractions?

The real ‘great game’, however, is that currently brewing up between the US and China which is increasingly being identified in Washington DC and in other Western capitals as a source of growing disruption as well as a supplier of low-cost goods in vast quantity.

China’s President Xi has just presided over celebrations to mark the 40th anniversary of the economic reforms unleashed by his predecessor, Deng Xiao Ping. Deng famously suggested that as long as the cat is catching mice, it does not matter what colour it is.

Why one of the longest American stock market bull runs in history has come to an end

The Chinese cat has grown fat and in the intervening period, its economy has grown to the point where it is challenging, if not surpassing that of the US. These days, the country’s leader is using his country’s economic clout to leverage influence and extract natural resources across the globe.

The US under Donald Trump has begun to respond and the result is a trade war between the two powers which has begun to broaden in scope.

Both parties are now applying tariffs of around 25% on a widening range of goods.

On the American side, suppliers of commodities such as soya beans have been particularly hard hit and the Trump administration has just announced a package of almost $5bn in reliefs for US farmers, many of whom have backed the President up until now.

The recent arrest of a senior executive from the leading Chinese manufacturer, Huawei, represents a major escalation in the conflict between the two nations.

Huawei is one of China’s best-known firms with a workforce of over 200,000. It is the largest manufacturer of telecoms equipment and the second largest producer of smart phones in volume terms after Samsung.

The detention in Vancouver by Canadian authorities of Meng Wanzhou, the daughter of the founder of Huawei was at the request of the US.

It comes as the Americans step up pressure on the Chinese to halt the theft of intellectual property and activities in cyberspace viewed as increasingly threatening.

The Chinese challenge to US paramouncy is now a global phenomenon. The five-year-old ‘Silk Road’ investment initiative symbolises the reach of China, though many states in receipt of Chinese funds for projects have woken up to the fact that such money – mainly in loans - comes with strings tightly attached.

Some now find themselves up to their neck in loan commitments on large infrastructure projects that have run over budget.

Mr Trump’s America first trade strategy has extended into its relations with its neighbours, Mexico & Canada as well as the EU.

The Americans have wrung concessions out of their smaller next door neighbours, though the accession to power of a leftist president Andres Obrador, a friend and ally of British Labour leader, Jeremy Corbyn, could put this trade détente under question.

The picture regarding the trade talks between the US and EU is equally confused. Early in the year, the US administration appeared to threaten an all out trade war, but a peace of sorts broke out when the EC President, Jean Claude Juncker, headed for talks with the President in Washington DC in July.

The US has imposed import duties on steel and aluminium products while there have been threats of similar tariffs on cars.

A détente appeared to be reached in July in respect of European car exports, but the mercantilist President remains tetchy over the scale of the US deficit in trade with the EU. The Americans are seeking greater access for agricultural products and the Commerce Secretary, Wilbur Ross, has recently warned that ‘the President’s patience is not unlimited’, a verdict with which few would disagree. Mr Ross’s own position looks under threat. 

As the year ended, the EU was -- in its words -- "seeking to raise the tempo of the trade talks". The US economy has been booming as a result of the ‘sugar high’ of tax reforms pushed through Congress, at the start of the year.

Annual growth has been approaching 6% and the labour market has not been this tight since the end of the 1960s yet the President, like his Russian counterpart, finds himself playing defence on the home front, having surrendered control of the House of Representatives to the Democrats.

He has been aiming fire at the recently appointed Chairman of the Federal Reserve, Jerome Powell, over the latter’s moves to tighten fiscal policy in an effort to curb inflationary tendencies building up in the economy.

Mr Trump has been paying close attention to hard line advisors such as Peter Navarro, a trade hawk and Stephen Miller, the President’s pugilistic domestic point man.

It will be interesting to see whether the Americans choose to concentrate their fire on the Chinese, aware that a trade war with the EU, in particular, could only serve to further destabilise global markets.

The Economist magazine’s editor in chief, Zanny Minton Beddoes, has suggested that the US President – having raised American hackles against China – could now find it difficult to achieve a settlement with the Chinese. 

“A quick and dirty deal that does little to change China’s underlying trade practices could see Trump attacked at home for caving into America’s ascendant rival.” 

As we enter 2019, Europe appears once again to be drawing in on itself. The challenges posed by Brexit vie with social breakdown and economic dislocation in France and with the challenge of a Government in Italy seemingly determined to breach EU deficit guidelines.

Spain could face further disruption from the Catalan secessionists while Eastern Europe appears to be drifting away from the core.

This leaves a Northern European core led by Germany, the Dutch, Scandinavians and Baltic States, along with Ireland, which appear to have formed a common purpose aimed in the main at reducing their exposure to the financial fault lines on the EU’s southern flank.

The threat of disruption posed by a so-called hard Brexit remains very real and it could yet pose a fundamental challenge to financial and economic stability across the EU, never mind the challenges for those regions most directly exposed.

The EU is facing into European elections, next summer, at a time when ambitious reform proposals have been put on the long finger.

The Commission president has talked about there being a ‘window for reform’, but there are few signs that the necessary fiscal back up will be provided for the Eurozone given the level of northern European distrust of their southern European counterparts and of Italy, in particular.

Europe’s economy looks to be entering into a period of slowdown with Brexit related uncertainty and other political risk weighing on investment plans and consumer spending intentions alike.

Once again, there will be expectation on the Germans to ramp up spending, particularly on infrastructure, but concerns over export prospects may only have served to boost natural German caution in this regard.

Looming over all of this is the level of bearish sentiment now affecting financial markets worldwide.

The US, in particular, looks less and less likely to act as a locomotive of continued recovery as its President faces growing legal pressures, Congress is divided and the fiscal sugar high begins to wear off.

A long period of investor infatuation with innovation may be giving way to caution. It may be time to button up.

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